Deutsche Telekom Reiterates: It is a Seller of T-Mobile US

About the only long-term uncertainty surrounding T-Mobile US is which other company eventually will move to acquire it. If the most fundamental decision a company can make is whether it is a strategic seller or buyer, Deutsche Telekom is a  strategic seller, having indicated years ago its intention to exit the U.S, market.

A future secondary consideration is whether an eventual buyer itself is a strategic buyer or seller. Some would consider Dish Network, a potential T-Mobile US buyer, as itself an eventual strategic seller.

And though, as the adage has it, “at the right price every asset is for sale,” many other potential buyers are strategic acquirers. That would include any number of application firms or Comcast.

Deutsche Telekom says it will consider any partner that can improve profitability at T-Mobile US.

"But it is our duty to go on improving the return on T-Mobile US," he added. "If we find a partner who will help us to do so, we will obviously consider it," said Deutsche Telekom Chief Executive Tim Hoettges.  

Connected Car Signaling, Not Bearer Traffic, Will be an Issue

Mobile network planners necessarily must grapple with problems fixed network architects traditionally have not faced, namely the mobility of users across the network. In other words, even if radio locations are fixed, usage is more dynamic than on a fixed network.

For that reason, signaling overhead is a bigger part of mobile network planning than of fixed network design and management.

A recent Qualcomm study of  smartphone application traffic in background mode illustrates one element of the problem. That study found some news applications generate four to six requests per hour, compared to social networking applications which generate one to four per hour, and location based applications which generate two to three per hour.

Bandwidth isn’t so much the issue as the signaling operations. A specific weather application might connect for less than three seconds, uploading less than two kilobytes of data. So it isn’t the bearer traffic; the impact comes from use of radio resources to create and tear down a session.

Social networking applications connected for two to four seconds and uploaded one to three kilobytes of data.

If nothing else is done (and obviously, something will be done), connected cars at rush hour could double data traffic double in certain cells, researchers at Machina Research say. And the issue there might be similar: intensive signaling, more than actual bandwidth consumption.

The study, commissioned by analytics company TEOCO, predicts a 97 percent increase in data traffic over the next decade, caused primarily by connected cars.

Some of you would not be surprised by a prediction of 100 percent increase in traffic, on any network, at any site, over a decade.

What the study intends to highlight is the specific new demand created solely by the connected cars.

By 2024, Machina Research predicts “machine-to-machine” mobile network connections increase from 250 million in 2014 to more than 2.3 billion worldwide.

Obviously, all those new devices, an order of magnitude more, would produce, all other things being equal, an order of magnitude additional demand. But the usage profile might be notable for its difference from human-used smartphones, tablets and PCs.

M2M applications and services will account for just four percent of overall network traffic in 2024, Machina Research predicts.

So bandwidth consumption is not the problem so much as network resource management, which always is more complicated than comparable fixed network planning, since the nodes are stationary.

The study suggests a number of ways the management problems can be addressed, including the integration of capacity supplied by unlicensed networks and offload.

History suggests that awareness of the coming problem will lead to actions that prevent the problem from developing.

Internet of Things Probably is a "Must Have," Not a "NIce to Have" Category of Apps

There’s a very good reason companies such as Huawei are so focused on the Internet of Things, and why one major assumption about fifth generation mobile networks is that the next generation of mobile networks will be the first to intentionally feature performance helpful for some IoT applications.

Simply put, we soon will reach a point where nearly every human being who wants to use mobile networks already will have bought service, supporting multiple devices as part of the service.

So if revenue growth cannot be driven by services for people, IOT is really important, as it opens the door to selling service to connected machines and sensors.

In that sense, IoT is not a “nice to have,” but quite possibly a “must have” new class of services.

There's No Point in Regulating A Dying Business

Not that the decision will be popular in some quarters, but the New Jersey Board of Public Utilities has voted to  remove price regulation for basic home telephone service, businesses with single-line service, charges for residential connection and directory assistance.

Sowmyanarayan Sampath, Verizon Communications SVP of transformation says Verizon’s copper-based revenue is declining eight percent to 10 percent a year.

At that rate, the revenue stream disappears in a decade.

If you want to know why tier-one telcos want to decommission the old “public switched telephone network,” that is why.

Internet Access Drives At Least Half of All U.S. Communications Revenue

Just what percentage Internet access now represents, as a percentage of total U.S communications service revenues, is a bit difficult to estimate. Internet access could represent a low of 33 percent of total industry revenue, or as much as 66 percent, depending on one’s assumptions.

U.S. consumers spent $100 billion on Internet access in 2013, according to the Government Accountability Office. That figure might include both fixed and mobile access, plus Wi-Fi and other spending. Other estimates suggest mobile data alone hit $90 billion in 2013, however.

In June 2013, there were 70 million fixed and 93 million mobile broadband connections with download speeds at or above 3 megabits per second (Mbps) and upload speeds at or above 768 kbps, according to the Federal Communications Commission.

Assume an average fixed access price of $40 a month, or $480 annual revenue, and a mobile average cost of $30 a month, for $360 annual revenue.

That would imply $33.5 billion in mobile revenue and $33.6 billion in fixed Internet access revenue, amounting to $67 billion in total revenue. Analysts who reach higher figures might use higher assumed recurring service rates.

But some have estimated there were 180 million Internet access accounts in service in 2013, more than the 163 million cited by the U.S. FCC. Assume 57 percent of the accounts were mobile, while 43 percent were fixed. That implies 102.6 million mobile accounts and 77.4 million fixed accounts.

Using the $480 annual fixed revenue per account, and $30 annual mobile account averages, in 2013 mobile Internet access might have generated $37 billion, while fixed access might have created $86 billion, for a total of about $123 billion.

So we might reasonably conclude that Internet access revenues, including mobile and fixed accounts was about $100 billion.

If 2013 U.S. communications service revenue was about $300 billion, then Internet access accounted for 33 percent of total revenue.

Some estimates peg industry revenue at higher levels, but the percentage of fixed and mobile revenue probably doesn’t vary much.  

Mobile revenue in 2013 was nearly $200 billion. Analyst Chetan Sharma estimates 2013 mobile data revenue at $90 billion, a figure that undoubtedly includes messaging revenue, in addition to Internet access.

Still, data services would have represented about 45 percent of mobile segment revenue.

Likewise, hIgh speed access accounted for half of fixed network revenue in 2013. As a rough rule of thumb, it would be reasonable to estimate that, by 2014, about half of all revenue on fixed and mobile networks was generated by Internet access sources.

Another inference one might make is that the greatest value of higher-speed access is supporting multiple users, not better experience for any single user. The most bandwidth-intensive application for the typical user is high-definition TV or other streaming apps, at 5 Mbps to 8 Mbps minimums.

Add in business segment revenues--always heavily weighted to capacity sales--and data services undoubtedly drive much more than half of all service provider revenue.

Big Changes in Strategic Thinking

There is a good reason T-Mobile US CEO John Legere has been talking up both the value of deals with cable TV operators or Dish Network. It is the same reason Liberty Global Chairman John Malone believes a merger with Vodafone Group would be a “great fit.”

The new thinking by most service providers is that long term success requires ownership of both fixed and mobile assets to create the ability to offer big service bundles including voice, messaging, mobility, video and Internet access.

Vodafone, the world’s second-largest mobile-phone company, has in the past largely been a mobile service provider. Liberty Global has been a fixed network operator. But Liberty now says it wants to buy mobile networks, and already has done so in Belgium.

Some of that same thinking might underlie Altice’s purchase of U.S. cable TV company Suddenlink Communications. Altice is the second-biggest mobile service provider in France, and also is the second-biggest cable TV operator in France.

The new thinking is leading to novel behavior. For the first time ever, a significant European telecom company is getting into the U.S. cable TV business.  

And Liberty Global, which historically had eschewed ownership of mobile assets, now has reversed course.

Altice Makes History: Enters U.S. Cable TV Market

For the first time ever, a significant European telecom company is getting into the U.S. cable TV business.  

Altice is buying Suddenlink Communications, the fifth-largest U.S. cable TV company, ranked by subscribers, for $9.1 billion deal. Some believe the move is preparatory to a bid for Time Warner Cable as well.

Suddenlink operates in Texas, West Virginia, Louisiana, Arkansas and Arizona. Its sales grew six percent in 2014 to $2.3 billion and operating profit grew at a similar pace to reach $905 million.

Altice is expected to emphasize aggressive cost cuts and profit margin, rather than growth.

Altice owns French cable company Numericable, the second-biggest supplier, and also is the second-biggest mobile service provider in France.

Inidia Now is Center of Net Neutrality Policy

India now is the fulcrum of debate over “network neutrality” principles, as regulators ponder possible rules that extend from “no blocking of lawful apps” to “no packet priorities” and “no zero rating of apps.”

Internet.org, the organization founded by Facebook that promotes app access by mobile users without buying a data plan, believes the India rules are highly important, as Internet.org believes some form of app subsidies are required to rapidly increase use of the Internet by mobile users in many developing markets.

Any rules that bar the offering of apps on a curated and “zero rated” basis (no mobile data charges incurred) would imperil the whole project, which aims to acquaint non-users with the value of the Internet.  

While defending Internet.org and zero rating, it appears Facebook might also be looking at backup plans that would be much more costly, such as Facebook paying for as much as 33 percent of the cost of a user’s data charges.

Whether even that approach would be allowed is the question.

Vodafone, India's second-biggest mobile operator, says it is waiting before making any decisions on zero rating until the telecom regulator Telecom Regulatory Authority of India  and the Department of Telecom resolve the matter as part of their review of net neutrality rules overall.

Unintended consequences (outcomes that are not the ones foreseen and intended by a purposeful action) are important. Such unforeseen implications are why it is so hard to create public or private policies that actually work only as intended.

Benefits, drawbacks and even perverse unintended consequences can happen. Drawbacks are unintended new problems caused by solutions to other problems.

A perverse effect is worse, producing an outcome contrary to what was originally intended.

Ironically, one unintended consequence of strong net neutrality rules that prohibit packet acceleration or zero rating is that Internet adoption could be slowed and innovation thwarted.

The Progressive Policy Institute argues that bans on quality of service mechanisms--including paid priority deals--undermines innovation for real-time applications like telemedicine and high definition voice.

Potential low-income users also suffer when subsidies such as zero rating are outlawed.

High Prices Will Deter Verizon from Bidding on New Spectrum

High spectrum prices might encourage Verizon Wireless and possibly other mobile service providers to use the other tools at their disposal to increase effective bandwidth.

Verizon isn't as hungry for spectrum as it once was, in part because prices have gotten too high, Verizon CFO Fran Shammo suggested at a J.P. Morgan investor conference.

Shammo said that given the premium at which spectrum went in the most recent AWS-3 auction increases the value of alternative approaches, such as adding more small cells.

"I think that the AWS-3 auction has given the FCC a little bit of a challenge around unintended consequences," Shammo said.

Basically, the high AWS-3 prices likely encourage TV broadcasters to hold out selling their licenses unless they get similar, or even higher prices. That means less spectrum will be made available.

At the same time, with the Federal Communications Commission also considering bidding rules that would further reduce the amount of spectrum available to major carriers, the gains Verizon could make are further limited, and likely also work to push prices higher.

"When you bid up spectrum so high and now you have broadcasters sitting on the sidelines thinking their spectrum is worth a certain amount of money, and then you have where the FCC is trying to draft the rules around favoring some carriers over others, I think you have a problem,"  Shammo said.

Unlike the recent spectrum auctions in India, where service providers virtually had to acquire new licenses to support their present operations, and therefore had to spend whatever it took to do so, Verizon and some other U.S. mobile service providers will not “need” to rely on spectrum purchases to expand bandwidth.

As always, assuming a reasonable amount of physical spectrum is available, service providers can use network architecture to effectively reuse existing spectrum, and take advantage of offloading to Wi-Fi more extensively.

In 10 Years, Verizon Communications Will Have Zero Copper Network Revenue

Increases or declines of any quantity at a 10-percent rate are serious matters. If anything grows at 10 percent annually, it doubles in 10 years. If something declines at a 10-percent annual rate, it disappears in 10 years.

It’s something to ponder seriously: Sowmyanarayan Sampath, Verizon Communications SVP of transformation says Verizon’s copper-based revenue is declining eight percent to 10 percent a year.

At that rate, the revenue stream disappears in a decade. If you want to know why tier-one telcos want to decommission the old “public switched telephone network,” that is why.

Will Video Profits Go to Zero?

With the caveat that 15 years is a time horizon too great to yield meaningful projections, Jason Bazinet, Citi Research analyst believes linear video distributor profit margin could fall to zero in 15 years.

That would be quite a shock in an industry segment used to 37 percent profit margins , as estimated by consulting firm EY.

Cable networks like AMC Networks, Discovery and Starz are projected to be among the networks whose present margins are in the 37 percent range.

Cable operators had 41 percent margins by the end of 2014, but not on the strength of their video entertainment operations, it appears. Cable operator margins “continue to remain the highest” among media and entertainment sectors.

But the key is the “continued growth in high-margin data and business-to-business services.” It isn’t so clear how well linear video might fare, if more consumers abandon the service. Zero profit margins are a possibility, some claim.  

By about 2020, smaller U.S. cable TV companies are going to experience zero profit margins on their linear video programming businesses, according to the American Cable Association.

Internet bandwidth, despite all worries about the “dumb pipe” implications, arguably is the highest-margin product most ISPs can sell. Mobile operators might also have relatively high profit margins on voice and messaging, but with low gross revenue in some cases, and declining gross revenue in other cases.

Only the high speed access product has both high gross revenue and high profit margins.

One issue is precisely how high profit margins might be, for various providers.

Smaller ISPs, as you would guess, tend to have lower margins than some tier-one ISPs. One study of smaller Australian and New Zealand ISPs estimates gross profit margin between 26 percent and 39 percent, for example, before adding in overhead and other costs not directly related to access, transit costs or backhaul.

Some might claim cable’s broadband gross margins are about 95 percent, versus 60 percent for video, according to Craig Moffett, Sanford C. Bernstein & Co. analyst.

That is not so. That figure by Moffett applies only “cost of goods sold” against revenue.

Moffett’s cost of goods sold takes into account only the day-to-day costs of running the network, as opposed to building it. In other words, COGS includes only out of pocket operating and marketing expenses, for example, not amortization of the network construction.

This produces gross profit margins that make cable companies’ profits look artificially high.

Net margins are another matter, since gross margin does not include all other overall and allocated costs.

Many estimates now suggest that net profit margin for video entertainment services now routinely are as low as 20 percent, where once net margins were about 40 percent. The same is true for broadband access, which estimates now suggest are about 40 percent, not the 97 percent “gross margin” figure.

Whatever you think the relevant percentages are, there is no question but that, for cable operators, Internet access bandwidth increasingly is more valuable than video entertainment bandwidth, as the profit margins are roughly double those of video entertainment service.

The point is that video distributors, in most cases, do not make profit margins higher than 20 percent, and the direction of change is lower. Competition, declining sales and higher marketing expense are among the reasons why profitability arguably is dropping.

So even if a 15-year time horizon is too far away to be meaningful, profit pressures are growing.

LTE Subs Doubled in 2014

The global Long Term Evolution fourth generation market doubled in size to 445 million users in 2014, with annual growth in the number of LTE users will remain above 70 percent between 2015 and 2016, according to Digitimes Research.

By 2016 there will be 1.466 billion LTE users, representing 70 percent of the total number of global mobile broadband (3G and 4G) users.

Driving that growth is the Asia-Pacific region, especially China. The Asia region will surpass North America to become the world's largest consumer LTE market

in the first half of 2015.

Separately, the wireless trade association “4G Americas” predicts LTE connections have reached 498 million accounts worldwide, with Asia surpassing North America in total subscribers.

China LTE subscribers are the reason Asia has so many LTE subscribers. South Korea is among the countries with high LTE adoption rates, at about 59 percent of all mobile users on the LTE networks there.

LTE-Advanced deployment also is a major industry trend. Some 116 mobile operators, about 30 percent of all LTE operators, are investing in carrier aggregation technology worldwide and are at various stages of deployment.

Some 17 percent of LTE operators have commercially launched LTE-Advanced service.

Most LTE-Advanced system deployments support speeds of 150 Mbps up to 300 Mbps downlink and 50 Mbps on the uplink.

Of 52 commercially launched LTE-Advanced systems, 30 support the maximum 300 Mbps theoretical peak downlink speed, operating in 20 countries: Australia, Austria, Belgium, Estonia, Finland, Germany, Greece, Hong Kong, Jersey, Norway, Portugal, Romania, Russia, Singapore, Slovenia, South Korea, Spain, Switzerland, UAE, and the United Kingdom.

Globally, 393 operators have commercially launched LTE systems in 138 countries, according to the Global mobile Suppliers Association.

About 644 operators are investing in LTE  across 181 countries. GSA predicts there will be 460 commercially launched LTE networks in operation by the end of 2015.

What is the Value of the Fixed Network?

What is the strategic value of the fixed network in a mobile-dominated communications market? Ironically enough, backhaul. One way of looking at the volume of access is to note that, in 2013, about 59 percent of all traffic used “wireless” access. But that might overstate “mobile” and understate “fixed” access.

In 2013, 41 percent of traffic used a classic “fixed” connection, while 55 percent used Wi-Fi, according to Cisco. By 2018, perhaps 61 percent of traffic will be generated by  Wi-Fi connections, 15 percent by the mobile networks and 24 percent by the fixed network.

But if one assumes Wi-Fi is the default “in building” distribution, then as much as 96 percent of device traffic used an untethered connection. In 2018, the fixed network, despite mobile access growth, might still represent as much as 85 percent of all device Internet access.

In other words, the most important, and most dominant role for fixed networks is backhaul of Internet traffic.

The distinction between “mobile” and “fixed,” in that sense, is almost moot. By 2018, only 15 percent of traffic volume will directly use the mobile networks.

All the rest will be backhauled through the “fixed” network.

And, increasingly, even some of the “mobile” traffic will use unlicensed spectrum and the Long Term Evolution non-licensed access protocols (both LTE-U and license assisted access).

The present difference between the protocols is that LTE-U does not use “listen before talk” while LTE-LAA does use “listen before talk.”

LTE-U s likely to reach commercial use sooner, as it is allowed in China, Korea, India and the United States, markets big enough to drive early and massive adoption.

What remains unclear are the actual advantages in cost per bit using either form of LTE in unlicensed spectrum or just staying with Wi-Fi access as the complement to LTE.

In all three cases, though, the value of the fixed network is as a backhaul mechanism for the great bulk of device traffic.

Vodafone Turning a Revenue Corner?

Vodafone revenue declined, year over year, for the period ending in March 2015.

But revenue has been growing in recent quarters, a sign some interpret as evidence the cyclical dip is over. 

In fact, many seem to believe broader market revenue growth will reignite in 2017, after stabilizing in 2015 and 2016.

Unfortunately, the full-year results have not been unusual over the last several years. Revenue declined in 2014 and 2013 as well. Without Verizon, results would have been worse.  

Revenue growth was nearly flat between 2010 and 2012. Across Western Europe, forecasts for revenue growth are negative. The issue is whether the revenue pressure is structural or cyclical.

Since 2011, Vodafone has had a negative 3.4 percent revenue growth rate, the impact, one might easily conclude, of selling its stake in Verizon Wireless.

At least some believe the problems are cyclical.

To be sure, some analysts have forecast similar problems in the U.S. mobile market, and so far, the predictions arguably have failed to emerge, although some might argue the profit margin for mobile Internet data is plummeting.

A study sponsored by Tellabs, and published in 2011, pointed out declining margins for mobile Internet access. But that is not the same thing as declining margins across the whole business, for every service provider. AT&T and Verizon have had different results than Sprint or T-Mobile US.

Also, observers might disagree about what is happening in the U.S. prepaid segment. Some have argued prepaid will grow. Others might argue that it appears prepaid users are migrating to postpaid plans, as the U.S. mobile marketing wars are making postpaid a more affordable option.